Financing FAQ

Financing FAQ and Qualifying Parts 1-3

There are a lot of aspects to financing a home. Here are some of the most common questions and detailed answers.

What are the types of loans?

There are many types of loans such as personal loans, auto loans, student loans but the main categories these loans fall under is either a secured loan or an unsecured loan.

A secured loan means that you have to give something of value called collateral to the lender in order to obtain the loan. An unsecured loan means that you do not have to give collateral to obtain the loan. An example of a secured loan is giving a ring for a loan at a pawn shop. An example of an unsecured loan is a personal loan from a bank that requires no collateral. 

What is mortgage?

A mortgage is a special type of secured loan given to home buyers that states the title of the home will be the collateral.  All mortgages are secured loans. If the buyers cannot pay the mortgage payment, they can be caught in default and their home can go into foreclosure if they cannot pay. 

Foreclosure is when the home is taken back by the bank and possibly sold at an auction. One way to avoid foreclosure is by doing a short sale. A “short sale” lets buyers know that the home is in distress. Distress means that a potential foreclosure is imminent. Another way to avoid foreclosure is take out the equity on your home or refinance if you can find a willing lender. You might also consider a loan modification before foreclosure.

How much should someone put down on a home?

Whenever someone buy a home through financing, usually a down payment is a certain percentage of the price of the home. In the old days, 20% was typical. But today, with many new home buyers and loans being so affordable the typical percent that people put down varies widely.

Many people like to put down as much as they can in order to make their monthly payments lower. Some people like to put down as little as possible to be able to keep their funds but this can cause an offer to look less attractive to the owners.

Keep in mind, a low down payment will also cause the mortgage company to require mortgage insurance which will be paid by the buyers for the life of the loan if. If a down payment is 20% of the total amount of the home, most mortgage companies will not require a mortgage insurance.

The amount put down is something that should be decided between the parties buying and their realtor who can advise what the best options are especially in a competitive housing market. The best option is to save and put down as much as you can.

Can I buy a home with no down payment?

Buying a home with no down payment could have been something advisable in the recent past for new home owners. That was something that lenders liked to do to help new home owners, however in today’s market, with homes for sale being in scarcity, the pickings are so slim that many are willing to up the down payment significantly. The best option is to put at least something down in order to compete with other buyers who are looking at the same houses you are.

How do I qualify for a loan?

Qualifying Part 1

The first thing you want to do even before thinking of prequalifying is to keep track of your credit reports and FICO scores. You credit reports and FICO scores are being monitored daily and weekly by the three credit bureaus, Experian, Equifax, and TransUnion.

To get ahead of this, you can pay a small monthly fee to look into each one to see where you are. The one I recommend is Experian. It is $19 a month. Equifax is $4.99 a month but is not as detailed. TransUnion is $24 a month and not as detailed as Experian. 

From the Experian dashboard can see your credit reports for all 3 immediately if you pay an extra $24 or wait 3 months and get all 3 scores for free. Every 3 months Experian will give you all credit bureaus reports with their membership.

There are in total, 8 FICO scores. There is also a “credit report” that is in paragraph format. The credit report says in words what is good and bad as far as your payment history. You can also do an “Experian boost” in which you can connect a phone payment or another utility and have that payment work to help boost your score every time you pay. This requires you connecting your bank account and paying that utility through your bank.

Here are the 8 FICO on your report. Three “bank card” 3 “auto” 1 “mortgage” and 1 “overall”. These FICO’s are taken into consideration by the banks that are looking into your history when deciding to lend money. Example; if you are trying to buy a car, the dealerships lenders will look at your “auto FICO scores” not your “bank card” scores, etc. This is why it is important to monitor your credit as much as they do.

Another reason I highly recommend Experian is because you can also monitor your emails, (meaning if someone is trying to use your name, or email on the dark web or in any situation), social media profiles, social security number, or take out a mortgage in your name, you will be notified immediately. If anyone at any time does anything in your name you will get the report of who, where, when, what city, etc.

This hard evidence can be used to file police reports, used in a court of law, and gives you information on potential predators, stalkers, thieves, and hackers, that you may otherwise not have known about.

More about credit. A credit history is different from a credit report and those are both different from your FICO scores. A credit history is your loan history. A credit report pulls info from your history such as any late payments or on time payments and other credit information such as loan shopping.

Loan shopping would be either a soft or hard “pull” of your report. You do not get a ding for a soft pull. You do get a ding for a hard pull. A hard pull will stay on your report for 2 years. A FICO is merely a snapshot of your “willingness” to pay back your loans and financial obligations. A FICO uses the info from your credit report to give you a score. This is the most important thing banks take into consideration when deciding on giving credit.

You can increase your FICO by paying your credit cards on time and keeping no more or less than a 30% balance on your credit cards at all times. Keeping a $0 balance will work against you. Keeping less than 30% will take longer for your score to increase.

(Banker’s secret: 30% is the sweet spot if you want to increase your score in the shortest amount of time possible.) You can also boost your report and FICO by getting a secured credit card from a bank. This will help those who are struggling to get out of a bad or fair credit rating into a good credit rating.

Your credit report will give banks information on how much you have outstanding in loans vs. how much your income is, which is called debt to income ratio. The debt-to-income ratio is a type of calculation that is used by lenders, business, and accountants to get a clearer snapshot of the financial health of a business or person. Think of it like a bankers diagnostic scanner.

Knowing all this information ahead of time, because you have monitored it, can give you a more advantageous strategy than going in to get a loan not knowing what to expect. You might even be able to negotiate the finance rate with more confidence. It will ensure that you are confident and secure when applying for loans.

Your report will also contain when you shopped for loans, your payment history, any statements from creditors, any statements from you, any charge offs, any late payments and how late they were, any collections, and any bankruptcies or defaults.

Qualifying part 2

Then next thing you need to do is have a job or if you are an employer or business owner, you need to show proof of income. They will want to see monthly bank statements, possibly tax returns, paycheck stubs, or deposit slips.

If you are thinking of purchasing a home, lost a job, but are getting another job, consider staying in the same field of work you previously worked in. The banks—mortgage lenders – take this into consideration. If you worked in one field, then got a job in another field, you will have to wait for a year until you have worked in that field in order to obtain a mortgage loan.

Qualifying part 3

Once you have all your ducks in a row and are ready to see if you qualify for a loan you will want to see how much you will qualify for. That is your purchasing power. You can do this by getting a pre-purchase evaluation. This is something a realtor will guide you with and help. She or he will make recommendations as to where to have this done. Usually its via online, you put in your information and within a day or two you should be given an answer as to what you qualify for.